In China, Bad News Could Mean Good News

Today, MoneyShow's Jim Jubak discusses China in regards to the adage "Bad News is Good News," because bad news about China's economy might hasten the start of some kind of Chinese government—or financial—stimulus.

You’re familiar with ‘Bad news is good news” markets from the behavior of US stocks during the last year on negative news about US economic growth. The market’s rallied on many bad news days, on the theory that weaker than expected US economic growth would keep the Federal Reserve from cutting back its purchases of Treasuries and mortgage-backed securities, and put off any increase in short-term interest rates.

It looks like China is headed into that same kind of “bad news is good news” direction. I think it’s a little early to proclaim that this logic is in the ascendant, but I do think traders are starting to think that more bad news about China’s economy is a good thing, because it pushes up the start of stimulus from the Chinese government and the People’s Bank.

The latest evidence is in the reaction to a weaker-than-expected Purchasing Managers’ Index for the manufacturing sector from HSBC and Markit Economics. The survey, which precedes the official government data, dropped to 48.1 for March. That’s below the 48.5 reading for February and below the 48.7 consensus, among economists surveyed by Bloomberg. It also marked the fifth straight monthly decline. (In this survey, any reading above 50 indicates expansion and anything below 50 indicates contraction.)

Stocks in Shanghai initially fell 0.2% on the news but then rebounded to close up 0.9% for the day.

The official purchasing managers index from the National Bureau of Statistics and the China Federal of Logistics and Purchasing is due on April 1. In February, the official index came in at 50.2, still on the side of expansion, but also, an eight-month low.

According to a Bloomberg survey, the consensus growth forecast for China’s economy for the first quarter of 2014, among economists, fell to 7.4% in March, from 7.6% in February.

So far, whatever the market might be starting to anticipate, the Beijing government isn’t talking stimulus. Earlier this month, the State Council said that new spending wasn’t in the cards, but that the government might front-load existing spending programs.

I still think it’s likely to be June or July before the government and the People’s Bank actually announce any new concrete stimulus programs.

But it sure looks like the market will anticipate those moves long before they actually materialize.